Canadian marijuana legalization appears to be on fast track, says Clarus

Clarus Securities analyst Noel Atkinson says comments yesterday from Canada’s Minister of Public Safety Ralph Goodale are a sign that marijuana legalization is closer to becoming a reality than previously thought, a development he thinks is very good news for Licensed Producers (LPs).

In a research update to clients this morning, Atkinson notes that in an interview with the CBC’s “On The Coast” host Stephen Quinn, Goodale said the government was moving forward with is goal of legalizing recreational marijuana in Canada and that a legalization task force of representatives from the federal, provincial and municipal governments would soon be appointed.

“The preset regime with respect to marijuana has obviously failed and failed miserably because Canadian teenagers are among the heaviest users of marijuana in the Western Word, yet there has been no timeline set by the federal government,” Goodale told Quinn. “Municipalities and provinces want to be involved in how this is structured and how this is done. They want it to be done right and they want to be engaged in doing it right. That task force involving the provinces and municipalities will be announced very shortly. We’ll have a detailed announcement coming in the next several weeks.”

Atkinson says this development has positive ramifications for publicly listed licensed producers such as Aphria, Canopy Growth Corp., and Mettrum Health.

“This is the first concrete statement we have seen from a senior government minister that the federal government intends to move forward quickly with legalization of recreational marijuana,” says the analyst. “We believe the licensed producers (APH, CGC, MT etc) will see their stock prices rise once that formal announcement occurs in the next several weeks, as the licensed producers are positioned to be the primary wholesale suppliers to a government-regulated retail network for recreational marijuana.”

On April 1st of 2014, new rules were introduced that changed the Canadian government’s approach to marijuana and laid the groundwork for what many think is the inevitable legalization of the substance here. In the meantime, a half-step was taken. Under the Marijuana for Medical Purposes Regulations (MMPR), Health Canada no longer supplies marijuana to those with a proven medical need but instead tasked licensed commercial producers (LPs) to do so.

Atkinson says the market opportunity for licensed producers is huge and that Aphria (TSXV:APH), a stock that the analyst has a “Buy” rating and one-year target of $2.25 on, in particular is poised to realize upside.

“We estimate that the annual recreational market demand in Canada will exceed 1 million kg (1 billion grams), suggesting a wholesale market opportunity for the licensed producers of more than C$4 billion per year,” he says. “We also expect that 5-6 of the largest, best funded, and most capable licensed producers (again APH, CGC, MT plus likely Aurora, Tilray and CanniMed) will be the only ones able to scale to serve such a large market and therefore together assume a dominant market share of the wholesale production of recreational marijuana. We think APH is particularly well-situated in this regard because it has the only management team with a track record of producing, packing and wholesaling health products (Jamieson vitamins) at scale ($250MM/year).”